Budget 2014 in spotlight at KPMG Forum

Wednesday, 27 November 2013 00:30 -     - {{hitsCtrl.values.hits}}

By Kinita Shenoy With a broad-based approach to incentives and taxation, 2014’s Budget did not put forward many drastic changes, with the express intention of sustaining a consistent business environment. Presented and evaluated at KPMG’s forum, the audit, advisory, and tax services firm succinctly covered the key points proposed by the Government and the implications for their clients. The keynote speech was delivered by Central Bank Governor Ajith Nivard Cabraal, and put forward a few basic insights as well as the background of budget making. Thrust and objective The Governor stated that whilst the focus of earlier budgets has been primarily just revenue and taxes, 2014’s covers concepts ranging from development strategy and agriculture to research and health services. He added, “Today, the business community has gone beyond that into other areas. We must look at the incentives and direction of the GOSL. What is the thrust and objective?” In that context, he explained that whilst examining some of the key areas of the budget and looking at the overall thrust presented by the President, it addresses economic growth. He elucidated, “Provisions of the new budget have their roots in the ‘Mahinda Chinthana,’ which shows consistency. All these areas enunciated stem from these, that which the people of SL have endorsed.” Cabraal also discussed the policy of non-inflation. “Previously inflation was at 12-15%. Today we have set a new benchmark – we are not okay with 15% or even 6%, we want it lower. There is a commitment by both the Central Bank and Government to maintain an environment that is conducive to economic growth and stability.” He added that the President in his capacity as Finance Minister has for the first time this year articulated concrete goals, such as eventually bringing down fiscal deficit to 3.5% by 2016. Previously, he explained, these were tangibles no one wanted to commit to. “This year however, our goals are articulated clearly and our policies are structured to get us there.” Five hub concept The Governor touched upon several other features of the new Budget, in particular the much-discussed ‘five hub concept’. “We are now looking at a $ 4,000 per capita income, or to go beyond that. We are searching for new stars in our business to nurture, looking to diversify and reduce dependencies. If you look at most of the areas discussed in terms of incentives and support, these five hubs are the key to the development process.” Cabraal jokingly suggested that the country’s economy should be viewed as a company – “Sri Lanka Inc.”. He added: “If you want the business to grow, you can’t just retain old cash cows and expect them to sustain you forever. We need to diversify.” Shipping and aviation Going on to discuss specific industries, he mentioned that the President has spoken of strengthening the shipping industry, by having services taxed at a lower level, and focusing on more ships and skilled workers for the maritime industry, as each new “wave” of development is undertaken at the ports. Cabraal further mentioned that the private sector needs to take stake in those entities, as the Government is creating an enabling environment. Moving on to the aviation industry, the Governor explained that whilst Sri Lanka is a natural hub due to its location, tax incentives are also required to maintain competitiveness. Touching on backwards integration, he added that VAT and NBT have been exempted, and it is necessary to make use of the huge investment that has been made in order to ensure growth. Human resources Cabraal mentioned that a fundamental position has been taken on development of human resources. “A brain gain needs to happen. Professionals have now been given many incentives to remain or return to Sri Lanka, to create further economic activity. Take for example a law, accountancy, architectural, or engineering firm, which consists entirely of people, but which in turn services so many other businesses. In this way, the President aims to support all other industries via the knowledge centre and industry.” Banking sector He also discussed the emphasis on a strong and consolidated banking sector. “The current share capital of the Central Bank is only Rs. 15 million, which was capital introduced in 1950 during a structural shift in monetary policy. We don’t have capital that has been contributed to show overall strength. This will now be raised to Rs. 50 billion, which shows an extent of stability and strength to external or foreign parties.” The Governor explained the relation to other sectors as well: “The financial sector is set to double. We have 58 finance companies, out of which 20 do 90% of the business. Provisions have been introduced to promote an element of consolidation, and strengthen the finance sector. Banks too cannot continue along the same lines. The real sectors – plantation, construction, etc., require a strong financial sector to support them.” Debt market and stock exchange Cabraal further expanded on the development of the debt market and the stock exchange. “We need to expand market instruments, get more companies to list on the stock exchange, increase foreign investment and so on. We have to demonstrate good housing, clean areas, and better living conditions. This requires development in selected cities to ensure an overall trickle-down effect to areas surrounding them. These areas of development strengthen the social fabric and stability of the political environment. He insisted that it is vital we get our economic basics right, before the grandiose strategies, stating “An economy requires basic factors and structures to go further. The President has reflected on some, such as food security, which was never a priority earlier. Today, we ensure there are ample stocks in order to balance prices, and ensure conditions are good for farmers. Then, the present cash cows need to be supported, remittances, apparel, etc., as new challenges and threats emerge. All the stakeholders of the economy must be supported. The top most private sectors, with connections to the Government and media always make their voices heard. There are others however, medium and SMEs, women, and the poor, who do not have those resources, but are vital parts of the economy and need to be heard.” Doing Business indicators Discussing the global ‘Doing Business’ indicators list’, Cabraal admitted that Sri Lanka did not do as well last year as it could have. However, he added that he was “confident that our Doing Business indicators will improve this year, and we hope to eventually get to the 30th rank globally.” One of the features tracked in the indicator, is the percentage of EPF returns forms submitted online. He added: “The Government has also released a structure to follow which will increase our ranking, but a co-operative partnership between the private sector and the Government is required to make this happen. We need to improve our own way of doing business. The Treasury Secretary has been working towards making the tax return procedure simpler.” The Governor then went on to discuss other miscellaneous aspects included in the Budget. “We need to improve our legal standards, in terms of reforming the legal system, initiating speedier litigation and conclusion of cases. As for food security we must guarantee prices, and establish ourselves as a supplier to the World Food Program. We need to start reducing or removing dependency on other countries, to be a food exporter ourselves. We can become a net exporter of milk products if we get our processes right. Contributory pension schemes for farmers, fisheries and dairies may appear as small initiatives but make a huge impact together.” Empowering women Taking a look at small business development, he asserted that women must play a large part in it. “After the end of the war, there are many widows who need to be empowered.” The health sector must become an industry with foreign participation. Discussing incentives and allowances for academic lecturers, Cabraal added “Professional townships to not only attract young people but older people by creating housing structures. The housing stock of a country reflects the wealth of a nation as well as their growth capabilities. Over 60,000 sub-par housing facilities will be removed in the next five to six years. Innovative financing will create better housing. A UDA bond was floated, and with the money, the released land can be redeveloped, paying back the interest, making a bit of money and creating a sustainable model.” He went on to say: “The country needs to encourage the leading export industries – apparel and tea. Opportunities will arise by creating royalties and copyrights. Until recently, State-Owned Enterprises such as the CPC and CEB were making losses. But now 47 out of 52 SOEs have turned the corner, which means a new infusion of capital as well. The previous loans have been replaced, as their balance sheets look much better and they can move forward with confidence. A simple adjustment to their balance sheets, making the viability of their balance sheets much better as they can approach external investors, etc.” Readying for tomorrow What is the pipeline of investments that ensures today’s children suitable jobs for tomorrow? Cabraal added that new ventures must keep coming in, to ensure a clear pipeline of projects coming in to the country in the next few years. “Or else, there will be another insurrection until we get that right. Already our unemployment has come down to 4% or less, but this can get out of hand. So each year this must be addressed and new projects need to constantly be launched.” Touching upon the topic of debt sustainability, he added that private sector companies rely on debt to go forward. “The key, however, is to ensure debt is within repayable reach. The country’s liquidity ratio was over 105%. However, this has now been addressed very carefully, from 92% to 78%. We were ahead of 80% previously, and no one mentioned that we were in a debt trap. Our debt to GDP levels are going to come done on a sustained basis, along with the fiscal deficit coming down. We’re aiming for 60% by 2016.” When a country grows, investment needs to come in to ensure overall savings and maintenance of growth. Cabraal explained that “In the past, we saw that the country can only generate x savings and thus y investment, thus growth cannot go past 3%. Today we see investment coming in, via FDIs and debt capital. The debt control features allow it to come in safely. Debt dynamics will improve, the economy will grow, and poverty will go below 3%. The problem is that $ 3,200 per capita income countries do not receive grants any longer. Keeping this in mind, we have to make projects viable as we grow wealthier.” Sustaining growth A platform has been set in order to sustain the economy’s 7.5% growth. The private sector is energised, and the macro fundamentals are now in place. Cabraal added: “Inflation numbers along with fiscal deficit numbers that have been committed to will be achieved via proper management tightness. This will lead to sufficient investment and value creation. Our other targets are an export goal of Rs. 20 billion and service exports of over Rs. 10 billion by 2020. Maintaining a flexible exchange rate policy is key, and the Central Bank will be announcing relaxed controls on the first of January to give new impetus for business with capital from any part of the world.” The Governor wrapped up his keynote by briefly commenting that there was very little change in terms of tax policies. This was important as it gives trade chambers, professional bodies and the private sector an environment of consistency. In turn, he added, this gives investors confidence and an insight into the direction of the government and as to what needs to be complied with. Pix by Lasantha Kumara